Variable Overhead Efficiency
Variance:
Definition and Explanation:
Variable overhead efficiency variance is the
difference between budget allowance based on actual
hours worked and budget allowance based on standard
hours allowed.
If the
budget allowance based on actual hours worked is
more than the budget allowance based on standard
hours allowed, an unfavorable variable overhead
efficiency variance occurs.
If the
budget allowance based on actual hours worked is
less than the budget allowance based on standard
hours allowed, a favorable variable overhead
efficiency variance occurs.
Variable overhead efficiency variance is calculated when
overall or net overhead variance is further
analyzed using four variance method. Other three
variances that are calculated in four variance
method are
overhead spending variance,
fixed overhead
efficiency variance and overhead
idle capacity variance.
Formula:
Following formula is used for the calculation of
this variance:
Variable
overhead efficiency
variance = Budget allowance based on actual
hours worked  Budget allowance based on
standard hours allowed 
Example:
From the following
data calculate variable overhead efficiency
variance:
Actual
overhead 

$7,384 
Actual
hours worked 

3,475 
Units
produced during the period 

850 
Standard hours for one unit 

4 
Standard factory overhead rate: 


Variable 
$1.20 

Fixed 
$0.80 
$2.00 



Normal
Capacity in labor hours 

4000 hours 
Solution:
Budget
allowance based on actual hours worked: 


Budgeted fixed expenses 
3.200 

Budgeted variable expenses (3,475 actual
hours
×
$1.20 standard variable rate) 
4,170 
7370 



Budget
allowance based on standard hours
allowed: 


Budgeted fixed expenses 
3,200 

Budgeted variable expenses (3,400*
actual hours
×
$1.20 standard variable rate) 
4,080 
7,280 



Variable
overhead efficiency
variance (Unfavorable) 

$90 unfav 



*850
× 4 = 3,400 


When variable overhead
efficiency variance and
fixed overhead efficiency variance are
combined, they equal the
overhead efficiency variance.
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